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Putting Investor Goals Ahead of Benchmarks

"Your goals are your benchmarks."

Consider that statement to be one more piece of fallout from the financial crisis still leaving its imprint on mainstream Americans.

It comes from Cheryl Nash, a senior vice president of strategic marketing for investment services at Fiserv, a provider of information management and electronic commerce systems for the financial services.

Its meaning is found in the way that advisers, brokers and other distributors of mutual and exchange-traded funds have tried to judge their results or those of their clients.

Far too often, the measuring sticks have been market averages. Has the return on this fund beaten the average for all funds? Has this index fund beaten the return of the Standard & Poor's 500? How has this stock performed against peers in its sector?

That, says Nash, is beside the point for most investors. And if you want to get their attention-and their funds-you have to put in the hands of your investment representatives tools that let them measure results against what really matters: the client's goals, more than the rep's goal.

"That's what we missed throughout the whole financial crisis," Nash said. "Advisers didn't really focus on the investor's goals."

Instead, they made sure mainly that their portfolios were in line with an "investment policy statement" crafted for the customer and abided by their risk tolerance.

"But they measured that against how the market was doing. They didn't measure that against how the client needed those funds for specific life events."

The Securities and Exchange Commission is in the midst of addressing this, in broad strokes, with its effort to develop a single standard for how brokers or advisers need to put the interests-the goals-of retail investors ahead of their own.

The SEC expects to complete a six-month study on the matter on Jan. 21.

In the meantime, Fiserv's approach, not surprisingly, is to put the retail investor's goals at the forefront of its latest edition of AdvisorVision, its financial planning software.

In release 7.5, the company uses what it calls "dynamic menuing" to set up, from the start, what the investor's goals are, to set the benchmarks by which returns on funds and contributions made by the investor are judged.

The "life events" may be the financing of a new home purchase, tuition plans for children, long-term care for oneself or one's parents, etc. There can be target accumulations for retirement - or an emergency fund in case one lose's one's job.

In any event (or all events), the application then judges progress towards those goals-and carries out the execution, straight through to placing orders, as needed, according to Jeremy Schlarb, an investment services manager at Fiserv. The "vision" can even be tied, now, into the broker's order management system.

The rules-based advice engine then monitors the performance of the funds in an account and reports back, on an ongoing basis, how far along the investor is to achieving those goals.

When it comes time to adjust what's contained in the account, the software establishes a target re-allocation of the assets and forecasts what the change in overall risk is with the assets and what the return is likely to be. In a typical case, the return is maintained, while the risk is reduced.

The software applies Monte Carlo simulations at high-speed. In about 12 seconds, the existing assets and the new alternative allocation of assets are run through 500 different economic scenarios.

These are based on different assumptions about interest rates and other conditions; brokers or advisers can even create scenarios, if they see fit.

In any case, expected returns under "upside," "average" and "downside" conditions are computed for the foreseeable future (if the future is indeed foreseeable). Mountain charts show comparative results, to judge which set of assets will peak, when, over the course of the next nine years, for instance.

If the change in assets is not enough to reach the goals, there's one more adjustment that's made: the investor's incremental contributions-new investments-into the account.

When the process is done, the representative gets an action plan, in effect. The software provides a complete rundown of which shares in what stocks and what amounts of different funds need to be sold; and, conversely, what amounts are to be put into new funds or equities.

If connected to a broker's order management system, then the system, in effect, provides "straight-through" processing of changes.

And, once done, the progress towards an individual's or a household's goals are updated and tracked, again.

The results are rolled up into dashboards where the representative can see an entire book of business, who the top accounts are and where they are. But it's the measurement of progress towards personal goals, rather than against market returns, and the consistency of the presentation, that Fiserv believes sets the product apart.

And makes it interesting to wholesalers of mutual funds, Schlarb maintains. An adviser can set up the universe of funds that recommendations will be made from. Or a distributor can set up the application, in advance, with funds in place, that can be recommended, when allocations are made.

A Dallas-based retirement fund administrator, for instance, is giving the product to all the brokers and advisors that it uses. The software, then, in effect, comes pre-populated with the fund-of-funds companies that its represents - even if the advisers still get to present plans that meet their "vision."

And their customers' goals.

Meanwhile, a financial company that offers investing, retirement, banking and financial planning services to military families has picked up the software. USAA will start providing a streamlined version of the tools, online, to help its 8 million members meet their goals. This starts November 19.